Chapter 2

PERSONAL FINANCIAL MANAGEMENT

OBJECTIVES Describe the importance of personal financial

management Identify the significance of money management and

budgeting Identify the difference between gross income and net

income Create a personal budget Recognize money wasters Identify debt and debt-management resources Identify wise use of credit Describe the importance of savings and investments Protect yourself from identity theft

FINANCIAL MANAGEMENT

Personal financial management: the process of controlling your income and your expenses

FINANCIAL MANAGEMENTIncome

Income: money coming in Income may come from:

Parents Grants Student loans Job

After college and starting your new career your income most likely will increase

FINANCIAL MANAGEMENTExpense

Expense: money going out Common college expenses

include: Tuition, text books, supplies Housing Transportation Hobbies and entertainment Medical

PERSONAL FINANCIAL MANAGEMENT AFFECTS WORK PERFORMANCE

Personal finances impact all areas of your life Finances assist you in reaching life

goals Keep debt under control Affect your work situation

PERSONAL FINANCIAL MANAGEMENT AFFECTS WORK PERFORMANCE

Maintain a positive credit report Use credit wisely Begin savings and investment

now Protect yourself from identity theft Pay your bills

YOUR PAYCHECK

Do not overdo spending Now is the time to manage your

money Create a budget to help you

reach your goals Financial success begins with

discipline and planning

MONEY MANAGEMENTBudgeting

Budget: a detailed financial plan used to allocate money for a specific time period Reflects your goals Controls and prioritizes spending

Be honest and precise when creating a budget

MONEY MANAGEMENTCash Management

Cash management is the key to good budgetingRecord all transactions Carry a small amount of cashReduce trips to the ATM

MONEY MANAGEMENTSteps to Creating a Budget

1. Identify goals2. Attach financial goals to personal goals3. Determine monthly income (money in)4. Determine monthly expenses (money out)

Budget on a monthly basis Keep track of all spending Reduce money wasters

MONEY MANAGEMENT

Fixed expenses: expenses that do not change from month to month

Flexible expenses: expenses that change from month to month

Money wasters: small expenditures that you do not realize are actually using up a portion of your income

DEBT MANAGEMENT

Debt management involves: Debt Interest Net worth Assets Liabilities

DEBT MANAGEMENTDebt, Loans, and Interest

Debt: money you owe for borrowed funds Debt vs. expenses

Debt includes a loan with interest Expenses include bills that come regularly

Loan: a large debt that is paid in smaller amounts over a period of time and has interest added to the payment

Interest: the cost of borrowing money This is extra money paid to the lender

DEBT MANAGEMENTTotal Net Worth

Total Assets – Total Liabilities= Total Net Worth

Assets: what you own Car, home, furniture

Liabilities: an obligation to pay what you owe Car loan, home loan

Net worth: the amount of money that is yours after paying off debt

DEBT MANAGEMENTSteps to Get Out of Debt

Do not create additional debt Prioritize your debt Pay off the smallest amount or

the amount with the largest interest first

Take the extra cash from a paid-off debt and apply it to the next debt on your priority list

TALK IT OUT

What are warning signs that you may be getting into debt?

WISE USE OF CREDITManage Your Credit

Managing credit is the best way to stay out of debt

Do not abuse the privilege of credit and credit cards

Spend wisely and pay off the balance each month

Use credit only for items you can afford

Avoid taking out loans

TALK IT OUT

Identify potential terms and conditions that you should consider before getting credit from a lender

SAVINGS AND INVESTMENTS

Begin saving now Put away funds for short-term

goals or emergencies Rule of thumb: Have at least five

months’ income saved for emergencies

Have savings in a bank Determine if you should use a

regular savings account or a Certificate of Deposit

SAVINGS AND INVESTMENTS

Begin investing now Opportunity to increase the value

of your money Long term Involves risk Establish after you have a savings

account

IDENTITY THEFT

Identity theft is when another individual uses your personal information to obtain credit in your name

Prevent by: Disposing of any communication that

contains your personal information Shred or cut up any mail and delete any

electronic correspondence Keep copies of important information in a

safe place

IDENTITY THEFTTips to Remember

Do not give out your social security number over the telephone or Internet without verifying the authenticity of the company and individual requesting the information

Document all important numbers and keep them in a safe place

Practice good personal financial management Remove your name from credit card and

marketing lists

IDENTITY THEFTIf You Become a Victim of Identity Theft

File a police report Contact your bank, credit card companies,

and cell phone provider Do not change your social security number,

contact the Social Security Administration Fraud Department

Contact the credit reporting agency fraud lines

Document everything you do